A Dreamy Quarter for Tempur-Pedic

The quickly growing mattress retailer gives investors another reason to jump on their beds.

After Thursday's quarterly results from Tempur-Pedic(NYSE:TPX), I have to admit I would not want to be short the company right now -- yet 23% of the float is short. Fellow Fool Richard Gibbons made a compelling case for the company earlier this year at much lower levels, and has seen a 54% gain. As far as the short thesis goes, it seems like competition from Sealy(NYSE:ZZ) and others is failing to make inroads, and margins and sales growth are remaining strong even in the face of a housing slowdown.

The company delivered a solid third quarter: Year over year, sales were up 17% to $240.9 million, earnings per share doubled to $0.34, and domestic mattress unit growth was 26%. The strong unit growth is a further indication of strong market-share gains over rivals, which include Hidden Gems recommendation Select Comfort(NASDAQ:SCSS). More importantly for Foolish investors, cash flow from operations increased 56% to $46.7 million.

The only fly in the ointment seemed to be weak performance in Japan, while both the U.S and many key European markets experienced strong growth. To its credit, Tempur-Pedic is already replacing third-party distributors in Japan to try to improve things there.

With strong brand-name recognition coming from its ubiquitous advertising campaign, consumers are readily paying up for the original memory foam mattress. That willingness to pay up could easily translate to other situations as well. Signing up a major hotel chain as a mattress customer could be the next big step. Radisson Hotels is already providing Select Comfort mattresses at quite a few locations, and hotel chains have recently placed a renewed emphasis on providing comfort for guests with the so called "bedding wars."

In my mind, Tempur-Pedic would be a prize catch for any major hotel chain -- be it Marriott International(NYSE:MAR), Hilton Hotels(NYSE:HLT), orIntercontinental Hotels(NYSE:IHG), and serve as a strong selling point. Indeed, Tempur-Pedic executives recently affirmed that they were planning on a major marketing initiative next year to hotel chains to achieve exactly that step.

Even after a substantial run-up, Tempur-Pedic is still looking relatively cheap when compared with competitors. Despite stronger net margins (12% vs. 7%), and faster growth in the third quarter (17% vs. 6%) than Sealy, the companies still trade in roughly the same price-to-earnings range of 14 to 16. That kind of valuation may leave some more sweet dreams for shareholders.

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